Privatisation, Strategic Foreign Direct Investment and the Host Country Welfare

46 Pages Posted: 13 May 2007

See all articles by Arijit Mukherjee

Arijit Mukherjee

University of Nottingham - School of Economics

Kullapat Suetrong

University of Nottingham

Date Written: 2007

Abstract

Recent evidence shows that developing countries and transition economies are increasingly privatising their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). In an international mixed oligopoly, we analyse the interaction between privatisation and FDI. We show that privatisation increases the incentive for FDI, which in turn, increases the incentive for privatisation compared to the situation of no FDI. The optimal degree of privatisation depends on the cost difference between the public and the foreign firms, and on the foreign firm's mode of entry. We show that our results are robust with respect to the incentive contracts between the owners and the managers. The incentive for FDI and is higher under the incentive contract than under the no incentive contract, and the optimal degree of privatisation is almost always higher under the incentive contract than under the no incentive contract.

Keywords: Privatisation, FDI, Welfare, Incentive contract

JEL Classification: F12, F13, F23, L13, L33

Suggested Citation

Mukherjee, Arijit and Suetrong, Kullapat, Privatisation, Strategic Foreign Direct Investment and the Host Country Welfare (2007). Available at SSRN: https://ssrn.com/abstract=985937 or http://dx.doi.org/10.2139/ssrn.985937

Arijit Mukherjee (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 115 9514733 (Phone)
+44 115 9514159 (Fax)

Kullapat Suetrong

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

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